Dollar cost averaging means investing a fixed amount of money at fixed intervals of time. That’s a sensible approach, for example, if it means committing yourself to investing a fixed amount of your salary every month toward your retirement.

Because more units are being purchased at lower unit prices than higher unit prices, one can reduce the average cost of the investment. Dollar cost averaging removes the market timing problem by imposing discipline on your investment program.

The following hypothetical table demonstrates how dollar cost averaging works over a 12 month period with $100 per month invested consistently.

Month Deposit Unit Price Units Acquired
January $100 $7 14.29
February $100 $9 11.11
March $100 $7 14.29
April $100 $8 12.50
May $100 $8 12.50
June $100 $10 10.00
July $100 $10 10.00
August $100 $12 8.33
September $100 $13 7.69
October $100 $11 9.09
November $100 $12 8.33
December $100 $13 7.69

The average unit price over 12 months was $10.00 per unit [unit price totals divided by the total number of months]. The investor’s average cost to purchase these units was $9.60 per unit [total investment divided by total units purchased]. As you can see, the average cost per unit was lower than the average unit price over the time period covered. The investor was able to purchase more shares when the share price dropped and fewer as it rose.

To commence this kind of investment plan, you may want to consider an automatic chequing plan where monthly amounts are automatically transferred with your permission from your bank account directly into your Segregated Funds or Mutual Funds account. You may specify how much per month is to be transferred on a particular day each month into your investment account. The amounts you stipulate will automatically be directed into the fund you have chosen.

 

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